Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.

Wednesday, October 23, 2013

After a jury trial, appellant Bill Melot was convicted of one count of corruptly endeavoring to impede the administration of the Internal Revenue Code, one count of attempting to evade or defeat tax, six counts of willful failure to file, and seven counts of making false statements to the Department of Agriculture. Melot was sentenced to a term of sixty months' imprisonment, a significant downward variance from the advisory guidelines range of 210-262 months. He was also ordered to pay $18,493,098.51 in restitution to the Internal Revenue Service.

His underlying misconduct, he claimed, arose from his belief in various tax protestor positions that he was not subject to tax. The jury did not believe him and convicted. On appeal:

His appellate argument is confined to an assertion the Government failed to prove he did so willfully. He argues he had a good-faith belief he was not violating the law. See Cheek v. United States, 498 U.S. 192, 201-02 (1991).

The Court of Appeals rejected the argument summarizing:

In sum, the Government's evidence showed Melot routinely concealed income and assets from the IRS; used cash extensively, informing others that this was a means to avoid the payment of income taxes; and acted in a manner inconsistent with his asserted belief he is not subject to federal income taxes because he is not a citizen of the United States. All of the Government's evidence, together with the reasonable inferences that can be drawn from it, is amply sufficient to support the jury's finding that Melot was aware of his obligation to file returns and pay federal taxes and negates any inference Melot acted in good faith. n9n9 Melot points to his own testimony that (1) he genuinely believed the information presented in the "tax protestor snake oil" documents he read, (2) did not read the disclaimers associated with that literature, and (3) did not understand the Internal Revenue Code because it was "too complex" for him, as support for his assertion he held a good-faith belief that he was not violating the law. Based on its verdict, however, the jury clearly disbelieved Melot's testimony. To the extent Melot also relies on the testimony of Dr. Samuel Roll, that reliance is misplaced. Dr. Roll, a psychologist, testified at the sentencing hearing, not the trial.

The defendant also argued that his sentencing Guidelines calculation was incorrect because the tax loss should not have included federal and state fuel excise taxes. Those taxes were included as relevant conduct. The Court of Appeals affirmed their inclusion. From my perspective, the opinion offers nothing really new on relevant conduct, so I do not discuss that aspect of the Tenth Circuit opinion.

The Government cross-appealed the sentencing calculation. That cross-appeal is the focus of this blog on acceptance of responsibility. I quote this portion of the opinion in full:

IV. Cross-Appeal

In its cross-appeal, the Government argues the district court clearly erred in granting Melot a two-level decrease in his offense level for acceptance of responsibility. The district court not only granted the two-level reduction, it also increased Melot's offense level for obstruction of justice. See U.S.S.G. § 3C1.1. Application Note 4 to § 3E1.1 of the Sentencing Guidelines counsels that both the obstruction-of-justice enhancement and the acceptance-of-responsibility reduction apply only in "extraordinary cases." This court has adopted the following test to determine whether a case is extraordinary:

We . . . hold that in determining whether a case is "extraordinary" so as to merit both a § 3E1.1 reduction and a § 3C1.1 enhancement, the sentencing court must consider the totality of the circumstances, including, but not limited to 1) whether the obstruction of justice was an isolated incident or an on-going, systematic effort to obstruct the prosecution, and 2) whether defendant voluntarily terminated his obstructive conduct and truthfully admitted the conduct comprising the offense of conviction.

United States v. Salazar-Samaniega, 361 F.3d 1271, 1280 (10th Cir. 2004). The defendant must "present evidence to support the adjustment" and the district court must make findings to justify its conclusion that a particular case qualifies as an extraordinary case. Id. Here, the district court did not make the required findings. This is not a situation, however, in which it is appropriate to remand the matter to the district court to permit it to correct the procedural error. Had the district court not applied the obstruction-of-justice enhancement to calculate Melot's offense level, it was still clear error to grant Melot an acceptance of responsibility adjustment.

A district court has wide discretion in determining whether a defendant qualifies for the acceptance-of-responsibility reduction, and this court will not reverse the court's decision unless it is clearly erroneous. United States v. Gauvin, 173 F.3d 798, 805 (10th Cir. 1999); see also U.S.S.G. § 3E1.1 cmt. n.5 ("[T]he sentencing judge is in a unique position to evaluate a defendant's acceptance of responsibility and is, therefore, entitled to great deference upon review."). Despite this highly deferential standard of appellate review, it is the defendant's burden to prove entitlement to the § 3E1.1 adjustment. United States v. Ivy, 83 F.3d 1266, 1292 (10th Cir. 1996). Melot, thus, was required to "prove by a preponderance of the evidence that he has clearly demonstrated acceptance of responsibility for his offense." Id. (quotation and alteration omitted). The Sentencing Guidelines provide that a defendant can meet his burden by showing, inter alia, he truthfully admitted the conduct comprising the offense of conviction or voluntarily paid restitution prior to adjudication of guilt. U.S.S.G. § 3E1.1 cmt. n.1. A review of the record confirms Melot did neither of these things, nor did he engage in any other conduct demonstrating an acceptance of responsibility for his offenses. See id. (detailing a non-exhaustive list of factors the district court may consider when determining if a defendant has accepted responsibility). To the contrary, the record clearly shows Melot continued to deny that he willfully engaged in criminal conduct n10 and unambiguously shows Melot did not voluntarily pay restitution. n11n10 For example, although the jury found Melot guilty of making false statements to the Department of Agriculture, Melot testified under oath at the sentencing hearing that he "didn't lie or cheat or nothing" when he applied for the agricultural subsidies. See infra n.13.n11 Since his conviction, Melot has tenaciously opposed the Government's efforts to collect the restitution he was ordered to pay by the district court, attempting to thwart the collection of more than $18 million in outstanding income tax assessments and more than $6.5 million in outstanding excise tax assessments. In 2012, a federal magistrate judge issued a certification of criminal contempt against him in the ancillary collection proceedings, finding he "actively and intentionally participated in a scheme to fraudulently create a third party interest in his properties with the intention of defrauding the Court, sabotaging the orderly administration of justice and delaying the United States' lawful efforts to recover the judgment as ordered by the Court." Certificate of Criminal Contempt as to Billy R. Melot, August 6, 2012, United States v. Melot, No. 2:09-CV-00752 (D. N.M. (Dkt. No. 246)). These post-sentencing actions may be considered by the district court during Melot's resentencing. See Pepper v. United States, 131 S. Ct. 1229, 1242 (2011).\

Further, the Sentencing Commission has made clear that the acceptance of responsibility adjustment "is not intended to apply to a defendant" like Melot "who puts the government to its burden of proof at trial by denying the essential factual elements of guilt, is convicted, and only then admits guilt and expresses remorse." U.S.S.G. § 3E1.1 cmt. n.2. "In rare situations, however, a defendant may clearly demonstrate an acceptance of responsibility for his criminal conduct even though he exercises his constitutional right to a trial." Id. As guidance to sentencing courts on what constitutes such a "rare situation," the Guidelines provide the example of a defendant who "goes to trial to assert and preserve issues that do not relate to factual guilt (e.g., to make a constitutional challenge to a statute or a challenge to the applicability of a statute to his conduct)." Id. Here, Melot did not proceed to trial to preserve an issue unrelated to his factual guilt. He, instead, exercised his constitutional right to trial so he could challenge the mens rea element of the crimes charged in the indictment. See United States v. Alvarez, 2013 WL 5433604, at *3 (10th Cir. Oct. 1, 2013). He steadfastly maintained he did not commit the crimes charged because he did not act willfully. n12 His direct examination at trial began with the following exchange:n12 In [*29] his opening brief, Melot states his "defense was that he really believed that he did not owe any income taxes."

Q. All right. Did you at any time act corruptly? By that I mean knowingly and dishonestly with the intent to secure an unlawful benefit for yourself or anyone else in your dealings with the Internal Revenue Service?

A. No.

Q. Let me ask you with respect to Count 2 of this Indictment, did you during [*28] the years indicated in the Indictment, and basically 1987 to 1999, did you believe that you owed the IRS any income tax? Substantial or otherwise.

A. No.

. . . .

Q. All right. With respect to Count 3 through 8, did you willfully, as you understood your obligation under the law, fail to file a tax return from years 2003 to 2008?

A. No.

Q. Did you, sir with respect to Counts 9 through 15, make statements to . . . the United States Department of Agriculture with the intent of obtaining a thing of value? Did you make a false statement with that intent?

A. No.

Even after his conviction, he unflinchingly continued to maintain he did not act willfully. He filed a sentencing memorandum with the district court requesting the § 3E1.1 reduction and asserting he intended to testify at the sentencing hearing that "he went to trial in order to present to the jury that he did not willfully fail to pay taxes that he knew he owed." He further asserted he proceeded to trial because "he earnestly wished the jury to hear his rationale for not paying income taxes." Consistent with these statements in his memorandum, Melot denied he acted willfully at the sentencing hearing and maintained his innocence.13n13 At the June 27th sentencing hearing, Melot testified he did not file tax returns or pay taxes because he did not believe he was required to file or pay, characterized some of the trial evidence against him as slander, continued to deny that he lied to the Department of Agriculture despite the jury's finding he did lie, denied his trusts owed any income taxes, claimed his corporations were only formed for liability purposes, testified he threw away all the documents that would demonstrate he did not owe the amount of taxes assessed, claimed he had paid all excise taxes but did not have the documentation to prove it, and said he did not recall if he had a bank account. The district court specifically found that Melot's "testimony at sentencing concerning tax matters" was not credible.

Because the record contains absolutely no evidence supporting the application of the acceptance-of-responsibility reduction but, instead, clearly demonstrates Melot did not accept responsibility for his criminal conduct, the district court's determination that he was entitled to the § 3E1.1 decrease is clearly erroneous and Melot's sentence must be reversed.

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